Can non-profits be profitable? The movement toward self-sustainability

 

Paul Penley

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Paul Penley

Paul Penley

If you read annual reports from young community development organizations in Africa, you will most likely encounter a new gold standard: the self-sustainability percentage. It seems that the push to inculcate for-profit business practices into charitable work has created a whole new starting point for charities less than 5 years old. From day one, they are setting goals of 50% or 75% or even 100% self-sustainability in a few years’ time.

This value proposition gives donors the ability to view their grants as charitable investments. Their initial donations are scaling social enterprises that will eventually support themselves. One of the poster children for this self-sustainability movement is One Acre Fund. Since its launch with 38 farm families in 2006, One Acre Fund has grown to serve 54,000 families in 2011. One Acre Fund is exceeding 75% self-sustainability for 2011 and is aiming for 85% self-sustainability by the end of 2012.

One of the newest development organizations to launch with a clear commitment to self-sustainability is Nuru International. Nuru’s holistic development work encompasses agriculture, economics, water & sanitation, healthcare, and education. Nuru functions as a ‘General Contractor’ that combines and scales sustainable models from other NGOs. Borrowing fruitful practices from NGOs like One Acre Fund and Living Goods resulted in 52% self-sustainability for 2010, just one year after Nuru really got started. Nuru’s goal is to be completely financially self-sustainable within 15 years.

Successful businesspersons and the foundations their profits have endowed are highly attracted to these ‘non-profit enterprises’ that promise eventual self-sustainability. More foundations, like Echoing Green and the Mulago Foundation, are appearing in this space. But what should we make of this movement? Is the new gold standard of ever-increasing self-sustainability percentages a good idea?

The main concern is organizations getting distracted from their primary social mission. If revenue-producing activities are given disproportionate attention to push up self-sustainability percentages, the public good could take a back seat. This concern is understandable. However, the probability of NGOs lowering social impact on their priority list to focus on self-sustaining revenues seems no more likely than NGO mission drift in pursuit of the next big grant.

The best solution to the tension created from dual commitments to social impact and financial self-sustainability seems to be structuring an integrated double bottom line. Increased social impact can correlate to increased earned income. For example, Living Goods is a healthcare NGO in Uganda that sells life-saving and life-changing health improvement products through a network of Community Health Promoters. The more people who purchase their goods and services, the more revenue is created to cover operational costs. As Living Goods has made strides to reduce under-5 child mortality rates by 15%, it also reached 44% self-sustainability in 2010.

Since smart integrated double bottom line models can be created, the question becomes: Should every NGO move away from donor dependency and toward an earned income model?

In my opinion, every NGO that can cover its costs while avoiding mission drift should do it. In taking this stance, I am aware of the distractions that self-sustainability can create. For example, NGOs with little to no business expertise will try to start up profitable ventures and end up wasting resources. Pretending to run a profitable venture that actually drains organizational resources rather than creating revenue is a bad idea. If an NGO’s model focuses on social impact and tries to give lip service or a side project to revenue producing initiatives, it can be worse than just frankly acknowledging donor dependency.

Despite the mistakes that pursuing higher self-sustainability percentages can foster, it is well worth it. When you think about it, if the NGO doesn’t cover its costs from profitable ventures, then someone else will be asked to do so. There is no avoiding the fact that no-profit work must come from profitable work at some point.

I am excited to see smarter, integrated, self-sustainable models appear in every sector of social impact work. Healing Waters is doing it in Guatemala with fully self-sustainable water purification. CURE International has done it with cutting-edge orthopedic surgery in Zambia. One Acre Fund figured it out with agriculture, and Living Goods has used it in the last mile of healthcare delivery. Each one of these models could be critiqued by outsiders for ‘cashing in’ under the guise of the non-profit banner, but their social impact is unmistakable.

As the move toward self-sustainability continues, I’d love to know which programme areas you think can’t go down this road.

Paul Penley is director of research at the philanthropic advisory firm Excellence in Giving and creator of IntelligentPhilanthropy.com

Tagged in: business practices Mission drift sustainability


Comments (17)

Totan

Thanks Paul. Great post.


Gehleigbe Bobson Bleh

Paul, thanks for this article. I was wondering about registering a university as a for-profit or non for-profit. The university will need start up funds to begin. I am now convinced that starting a university as an NGO and move toward self-sustainability is the right path to follow.


BRIAN RIVERA QUEBENGCO

Paul, i will launching a self sustaining project for the City of Manila, here in the Philippines. It will be focused on single moms who are looking for livelihood. We will pilot with 20 women and teach them sewing. And then, the government of Manila will help them secure projects that will involve orders, which will translate into selling and profit. 1) Should i launch this as an NGO or a Social Enterprise? 2) If an NGO, how do i deal with the surplus or profit we will generate from selling the clothes/uniforms they will produce? 3) How can we slowly increase their income from doing the work?


twitter cursus

There's a big controversy these days in Social Media Advertising among the large corporation opportunities as well as the fact that the a lot more consumers are digitally empowered, the a smaller amount they would like to release their individual data and privacy to third parties.


Ruby

Thanks Paul for generating the debate. I am starting an NGO to work with women cancer patients. It would be nice to know, if an organisation with this kind of mission can be made self sustaining...


Paul Penley

Jeff - I really appreciate the expression 'profit for purpose.' It creates an attention-grabbing spin on the common expression 'for profit.' It also essentially captures the same goal I'm encouraging charities to set regarding revenue-generating activities that produce 'profit for purpose' inside their own organizations.


Jeff Mowatt

For us, the self-sustaining business with a social objective goes back 7 years to a white paper suggesting it as a theoretical alternative to traditional capitalism. It was first deployed to source a development initiative in Russia. Today the 'profit for purpose' business model has been an operational entity in the UK for 7 years. As you may see, our profit is re-invested to research and design soft power economic development initiatives with a focus on poverty eradication and childcare reform. Jim makes a good point above about mission alignment, which I believe can be overcome by the kind of value chain verification networks which have begun to emerge. There is still much scope however for the social equivalent of greenwashing.


Jim Fruchterman

I think one of the real issues here is the connection of the income generating activity to the mission. If your earned income activity is closely aligned with the mission, the issues of distraction or focus recede. If your goal is to generate good jobs through a social enterprise, your efforts to have a successful enterprise and elevate the effectiveness of the workers should be similar. I see these issues of distraction coming up more with unrelated or tangentially related business activities, which NGOs are much more often not successful at creating!



Dr. William Derban

Thanks Paul, for introducing such an interesting topic. It is not a bad idea for not for profits to cover ALL their costs, both locally and internationally, (as most will have offices in richer countries to raise funds) by selling serivces to the poor (and not from donations). Does anyone have any examples that demonstrate what happens after they actually make surpluses? Does it go to increased salaries of workers, lower prices for goods or expansion? Will we then see the 'donations' or 'how you can help' link dissappear from their web pages? It will be interesting to see what a not for profit does with a surplus. However, I do not believe this path is for all NGOs. NGOs often operate in difficult situations, where the market system and governments have fail. Building and repairing classrooms, health centres and general capacity building is often difficult for direct beneficiaries, such as children, to pay. There is still the need for pure philanthropy and I doubt there is a lack of funding out there to help others. So to your question, I do not believe that all NGOs should go down this route because it will not suite all situations, such as dealing with children etc. However, the drive for NGOs to be sustainable will not die out. It will change some of the NGOs and we will soon see a different type of NGO, some that are entrepreneurial in nature and can strive and attain self sufficiency and others who by the very nature of their focus area will be donor dependent.


Paul Penley

Mary - Some common nonprofit organizations that maintain near 100% self-sustainability in the U.S. are hospitals (Fort Worth's Cook Children's Hospital), credit unions (Alliant), sports clubs (California Youth Soccer Association), and adoption/foster care agencies (Bethany). They all have fee-for-service models that are practically indistinguishable from for-profit operations. The nonprofit status requires them to have programs delivering public good, prevents them from building profitability margins into their prices, and yet allows them to raise tax-deductible donations for special projects.


Mary McRae

I was wondering if anyone has seen this in the US? Thanks


Paul Penley

Shari - Great to hear you are taking strides toward self-sustainability. I'd be interested to hear how you have worked revenue generating products or services into the SeeYourImpact model. Chet - Thanks for the quick introduction to the opinions of Marshall Ganz on social movements. I hope my use of the term 'movement' was not understood in the same sense as the Civil Rights 'movement' but rather taken in the general sense of a shift in a particular sector. In my opinion, declaring this burgeoning trend to be a 'fad' is equally misleading. Although one sociologist or even a group of sociologists might prefer to create a technical definition for these terms in their discipline, no one man or set of papers has the final say on a word's meaning and its intersubjective use in a culture. Using the term 'fad' will, for some readers, sound like we know the trend will not last. It can imply that the shift will be short-lived. Since there has been a documented adoption of for-profit business principles in nonprofit 'best practices' (e.g., how boards govern, using business/strategic plans, etc.), this trend toward covering your own costs has a good chance of sticking. It also has the potential to challenge the powers that be. If significant levels of self-sustainability become a demand from donors as well as the model taught at nonprofit management courses & conferences, it just might change the rules for long-standing NGO and NPO giants who have recently only had to use accounting methods to produce the right financial efficiency ratios rather than demonstrate growing self-sufficiency.


Chet Tchozewski

While NPO or NGO self-sufficiency may be laudable for many reasons, the trend does not constitute a 'movement.' According to sociologists, social movements are different and distinct for several important reasons. This self-sufficiency trend is a 'fad', not a movement, because it focuses more on reallocation of resources rather than redefining power relations according to the definition proposed by Harvard social movement scholar Marshall Ganz in his paper "Leading Change: Leadership, Organization, and Social Movements." You can get the paper here: (http://www.hks.harvard.edu/fs/mganz/Current%20Publications/Ganz%20Chapter%2019%20%28HBS%29.pdf. ). Ganz says that; "Social movements emerge as a result of the efforts of purposeful actors (individuals, organizations) to assert new public values, form new relationships rooted in those values, and mobilize the political, economic, and cultural power to translate these values into action. ii They differ from fashions, styles, or fads (viral or otherwise) in that they are collective, strategic and organized. iii They differ from interest groups in that they focus less on allocating goods, than on redefining them; not only winning the game, but also changing the rules. iv Initiated in hopeful response to conditions adherents deem intolerable, social movement participants make moral claims based on renewed personal identities, collective identities, and public action." It may not matter to donors whether NGO self-sufficiency is a fad or a movement -- unless they specifically intend to support genuine social movements that challenge the underlying structures of social power -- or, as Ganz says, focused on 'changing the rules.'


Shari

Thanks for the inspiring post, Paul! We're striving for self-sustainability at our micro-charity startup, so it's helpful to hear of fellow sojourners on the journey.


Paul Penley

Chris - I agree completely. Putting some type of price on a service allows an NGO to determine its value in the eyes of the beneficiaries. The pricepoint also requires the NGO to do a proficient job of explaining how to use the product or service to get the most value out of it. That can result in much higher percentages of appropriate use and therefore intended impact on the beneficiary's life. KickStart's MoneyMaker is a great example. NGOs that give away free manual irrigation tools to African farmers find that only 30% end up being used to to create jobs and businesses. Kickstart sells them and gets better results. 80% of the manual irrigation MoneyMaker pumps that Kickstart "sells" create new jobs or business income (see http://www.kickstart.org/what-we-do/why-we-sell/). Since KickStart has to market how farmers can create potential income from using their pumps (before any farmer will buy it), their pumps end up being used almost three times more to create jobs and income. We always have to be aware of both the good and the bad involved in giving away products and services. Putting a price on products and services can increase an NGO's desired impact. So there is more good that can go on than simply raising the self-sustainability percentages!


Chris Horst

Good post, Paul. Another valuable contribution, often, with organizations targeting self-sustainability is that charging for products and services creates a "listening device" for the NGO. If the products or services are just given away, very rarely is there an adequate feedback loop on whether the products or services met the needs of the beneficiary. For someone like Living Goods, however, if they sell a medication which doesn't work or misdiagnose a medical issue; they're going to hear about it! The beneficiaries have skin in the game and have good reason to demand excellence. While these are somewhat separate issues, I do think they go hand-in-hand. Chris


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